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U.S. Securities and Exchange Commission

SEC to Publish for Public Comment Proposed Rules for Clearly Erroneous Trades


Washington, D.C., June 17, 2010 — The Securities and Exchange Commission today announced that the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) are filing proposed rules to clarify the process for breaking erroneous trades. The rules would make it clearer when, and at what prices, trades would be broken.

The proposed rules come in response to the market disruption of May 6 and complement last week's SEC approval of a uniform set of stock-by-stock circuit breakers. Those circuit breakers are now being implemented for S&P 500 stocks at every exchange and by FINRA.

The exchanges and FINRA are proposing a series of thresholds for breaking trades when prices diverge from the "reference price," typically the last sale before pricing was disrupted. On May 6, the exchanges only broke trades that were more than 60 percent away from the reference price in a process that was not transparent to market participants.

"Establishing clear and transparent standards for breaking trades helps provide certainty in advance as to which trades will be broken, and allows market participants to better manage their risks," said SEC Chairman Mary L. Schapiro.

Under current rules, there is not a clearly defined standard used for breaking erroneous trades. Exchanges may choose the specific percentage threshold away from the reference price where trades are broken. Today's rule proposals set forth clearer standards for breaking trades and curtail the exchanges' discretion to select a different percentage threshold at which they would break trades.

Under the proposed rules for stocks that are subject to single stock circuit breakers, trades would be broken at specified levels.

  • For stocks priced $25 or less, trades would be broken if the trades are at least 10 percent away from the circuit breaker trigger price.
  • For stocks priced more than $25 to $50, trades would be broken if they are 5 percent away from the circuit breaker trigger price.
  • For stocks priced more than $50, the trades would be broken if they are 3 percent away from the circuit breaker trigger price.

Where circuit breakers are not yet applicable, the exchanges and FINRA propose to break trades at specified levels for events involving multiple stocks depending on how many stocks are involved.

  • For events involving between five and 20 stocks, trades would be broken that are at least 10 percent away from the reference price.
  • For events involving more than 20 stocks, trades would be broken that are at least 30 percent away from the reference price.

As with the circuit breakers, these proposed rules stem from a meeting between the SEC, exchanges and FINRA shortly after the May 6 market disruption.

Last week, the SEC approved rules that require the exchanges and FINRA to pause trading in certain individual stocks if the price moves 10 percent or more in a five-minute period. Under the rules, trading in a stock will pause across U.S. equity markets for a five-minute period in the event that the stock experiences a 10 percent change in price over the preceding five minutes. The pause, which applies to stocks in the S&P 500® Index, will give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion. These new rules are in effect on a pilot basis through Dec. 10, 2010.

Today's proposed rules, which also are proposed to be in effect on a pilot basis through Dec. 10, 2010, will be available on the SEC's website as well as the websites of each of the exchanges and FINRA. The Commission intends to promptly publish the proposed rules in the Federal Register for a 21-day public comment period.

At Chairman Schapiro's request, the SEC staff also is:

  • Considering ways to address the risks of stop loss and market orders and their potential to contribute to sudden price moves.
  • Considering steps to deter or prohibit the use by market makers of "stub" quotes, which are not intended to indicate actual trading interest.
  • Studying the impact of other trading protocols at the exchanges, including the use of trading pauses and self-help rules.

The SEC staff is working with the markets and the Commodity Futures Trading Commission with regard to calibrating market—wide circuit breakers currently on the books — none of which were triggered on May 6. These circuit breakers apply across all equity trading venues and the futures markets.

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Modified: 06/17/2010